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Without looking closer, it may seem cheap: Low interest rates and government borrowing

Author

Listed:
  • Garín, Julio
  • Lester, Robert
  • Sims, Eric
  • Wolff, Jonathan

Abstract

Are periods of low interest rates advantageous times for governments to increase expenditure by issuing debt? Because borrowing costs are lower, some economists have argued that the answer is yes. We argue that the logic used in reaching this conclusion may in fact be too simplistic. Whether or not it is a good time to issue debt depends not on whether interest rates are low, but rather on why interest rates are low. We show that if interest rates are low because of an increased preference for saving, then fiscal sustainability allows increasing debt in a period of low interest rates. In contrast, if interest rates are low because of a decline in trend output growth, then it is not sustainable to increase deficit financed spending.

Suggested Citation

  • Garín, Julio & Lester, Robert & Sims, Eric & Wolff, Jonathan, 2019. "Without looking closer, it may seem cheap: Low interest rates and government borrowing," Economics Letters, Elsevier, vol. 180(C), pages 28-32.
    • Handle: RePEc:eee:ecolet:v:180:y:2019:i:c:p:28-32
    DOI: 10.1016/j.econlet.2019.02.024
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    References listed on IDEAS

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    Cited by:

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    3. Moreno Badia, Marialuz & Medas, Paulo & Gupta, Pranav & Xiang, Yuan, 2022. "Debt is not free," Journal of International Money and Finance, Elsevier, vol. 127(C).
    4. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20 [Dealing with Structural Change. Annual Report 2019/20]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920.

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    More about this item

    Keywords

    Interest rates; Fiscal sustainability;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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